Mid-Morning Look

Tuesday, July 13, 2021

As remains the case, U.S. markets manage to overcome negative news, rebounding off morning lows despite a “hotter” than expected monthly inflation report (CPI) and mixed earnings results in banks and consumer space. JPMorgan (JPM) posted an earnings bear on slightly weaker revs while Goldman (GS) posted a big EPS beat though trading revs were down sharply YoY. In the consumer space, beverage giant Pepsi (PEP) posts a beat and raise while food company Conagra (CAG) slides after lowering its forecast for the year citing inflationary pressures. A sharp rise in consumer prices in June reignited worries about economic growth peaking and raised expectations of a sooner Fed rate hike. Futures on the federal funds rate, which track short-term interest rate expectations, raised bets that the Federal Reserve will tighten monetary policy either in December 2022 or early 2023 in the wake of a stronger-than-expected U.S. consumer prices data (showed a roughly 90% chance of a rate hike by December 2022, fully pricing that scenario in January 2023). U.S. CPI jumped 0.9% on both the headline (vs. est. 0.5%) and core rates (above est. 0.4%) in June, both much hotter than expected. The May report showed respective gains of 0.6% and 0.7%. The June headline is the largest surge since the 1.0% jump in June 2008, while core MoM reading ties April for biggest gain since late 1981. Driving inflation: Car rental 87.7% (y/y change), Used cars 45.2%, Gas 45.1%, Laundry machines 29.4%, Airfare 24.6%, Moving 17.3%, Hotels 16.9% and Furniture 8.6%. Major averages again led by a surge in mega cap tech stocks with AAPL, AMZN, GOOGL, NFLX and MSFT all outperforming, lifting the Nasdaq and S&P 500 again.

Economic Data

·     Inflation data comes in hotter than expected as all CPI readings come in well above estimates: Consumer Price Index (CPI) MoM for June rose 0.9% above est. 0.5%; CPI YOY rose 5.4% vs. est. 4.9%; on a core basis (ex food & energy) CPI rose 0.9% vs. est. 0.4% and on a YoY basis rose 4.5% topping the 4% level – all coming in well above consensus

·     Small Business Optimism Index hit an eight-month high of 102.5 – included in the survey was a record high 39% of owners increasing wages, while 46% say they can’t fill positions which is running at a 2x clip vs the historical avg, and 47% of owners reported higher selling prices which is the highest on record since 1981.

Sector Movers Today

·     Bank movers; JPM 2Q EPS $3.78 vs est. $3.21 incl $3.0B or credit reserve releases firmwide; NII $12.9B, ROTCE 23%; reported revs $30.5B vs est. $31.4B; says consumer and wholesales balance sheets remain exceptionally strong; FRC Q2 EPS $1.95 vs. est. $1.73; Q2 revs $1.2B vs. est. $1.18B; Q1 NII +27.5% YoY to $1.0B; GS big earnings beat as Q2 EPS $15.02 vs. est. $10.23; Q2 revs $15.39B vs. est. $12.17B; announces reversal of credit losses of $92M (said trading rev. $4.90B, -32% YoY, with FICC sales & trading revenue $2.32B, -45% YoY, and equities sales & trading revenue $2.58B, down -12% YoY); HBMD to be acquired by FNB in an all-stock deal at $21.96 per share (about $418M) https://bit.ly/3r4TQkr

·     Industrial & Machinery; FTV announced that it has entered into a definitive agreement with Bayard Capital and Accel Partners to acquire ServiceChannel for roughly $1.2B; FAST Q2 earnings and revs in-line with consensus while gross profit as a percentage of sales, however, rose to $700.7M from $671.6M prior; RSG upgraded to Overweight from Equal Weight at Morgan Stanley given increasingly positive view of the waste sector relative to the market; JPMorgan upgraded shares of TEX, PCAR and AGCO to Overweight in industrials – TEX predicated on its current valuation, PCAR on view as a high-quality cyclical with a favorable competitive position and experienced management team and AGCO on valuation with $164 tgt; WBT slides after MIDD said it will not increase its offer for the co – allows merger agreement to terminate

·     Cannabis sector strong (CURLF, TCNNF, GTBIF, TLRY, CGC) after reports Chuck Schumer, the leader of the U.S. Senate and colleagues will be releasing a discussion draft of a long-awaited bill to federally legalize cannabis on Wednesday, Marijuana Moment has learned. Senate Finance Committee Chairman Ron Wyden (D-OR) and Sen. Cory Booker (D-NJ) along with Schumer will hold a press conference Wednesday to unveil a preliminary version of what’s being titled the Cannabis Administration and Opportunity Act. https://bit.ly/3wI8P56  

·     Asset Managers: AB said preliminary assets under management increased to $738 billion during June 2021 from $731 billion at the end of May; APAM prelim assets under management as of June 30, 2021 totaled $175.2 billion; CNS preliminary assets under management of $96.2 billion as of June 30, 2021, an increase of $2.0 billion from assets under management at May 31, 2021; BEN preliminary month-end assets under management (AUM) of $1,552.1 billion at June 30, 2021, compared to $1,543.5 billion at May 31, 2021; IVZ preliminary month-end assets under management (AUM) of $1,525.0 billion, an increase of 1.3% versus previous month-end.

·     Utilities & Solar; FSLR downgraded to neutral from buy at Citigroup and closing the 90-day catalyst watch we instituted on April 19^th saying several of the catalysts we laid out in our April upgrade have played out; in utilities, EIX downgraded from Buy to Neutral at Bank America with California and Edison International facing a multitude of emerging risks; Goldman Sachs upgraded DTE to its Conviction Buy list with $135 pt post spin-off of its midstream assets, saying it represents their top regulated utility idea in our coverage universe; WTRG was removed from the Conviction Buy list after recent outperformance and a lack of major near-term catalysts; MSEX to replace Luminex in S&P 600 at open on 7/15

Stock GAINERS

·     BABA +2%; shares of Chinese firms listed in the U.S. bounce as investor concerns eased after TCHEY received official approval for its $3.5B purchase of search engine developer SOGO

·     EA +2%; upgraded to Outperform with $168 tgt at BMO Capital as see the video game industry trending better than many investors had expected coming out of the COVID-19 pandemic

·     HBMD +29%; to be acquired by FNB in an all-stock deal at $21.96 per share (about $418M), based on the closing stock price of FNB as of July 12, 2021 https://bit.ly/3r4TQkr

·     NOK +7%; said it saw continued strength in the business, improving its expectations for the entire year and now expects to revise upwards its prior outlook ranges for 2021;

·     PEP +1%; with beat as Q2 core EPS $1.72 tops est. $1.53 on better revs of $19.22B vs. est. $17.69B and ups guidance as now expect our full year organic revenue to increase 6% (previous guidance of mid-single-digit growth)

·     TLRY +6%; cannabis stocks rise amid reports Senate Majority Leader Chuck Schumer, Senate Democrats Ron Wyden and Cory Booker will release a discussion draft of their sweeping marijuana legalization legislation at a press conference on Wednesday.

Stock LAGGARDS

·     BA -2%; after saying it would cut its 787-production rate as it works through a new production-related structural defect in its troubled twin-aisle airliner program

·     CAG -4%; food names slip as CAG ekes out modest Q4 beat but cuts year EPS view to $2.50 from $2.63-$2.73 (est. $2.63) to reflect increased inflation since the fiscal third quarter

·     CURO -5%; said it sees Q2 revs ~$187M for the quarter compared to the consensus of $190.16M and adj. EBITDA is to range between $43M and $47M

·     FSLR -2%; downgraded to neutral at Citigroup and closing the 90-day catalyst watch we instituted on April 19^th saying several of the catalysts we laid out in our April upgrade have played out

·     JPM -1%; mixed Q3 results as 2Q EPS $3.78 vs est. $3.21 incl $3.0B or credit reserve releases firmwide; and reported revs $30.5B misses est. $31.4B

·     RBLX -3%; as initiated with a Sell rating and $75 price target at Benchmark saying while believes Roblox offers “a unique and compelling investment opportunity,” the metaverse platform was a social utility during the pandemic that could unwind

·     SLP -14%; after the maker of software used in drug discovery posted fiscal 3Q revenue that fell short of expectations

·     WBT -5%; slides after MIDD said it will not increase its offer for the company – allows merger agreement to terminate

Syndicate:

·     ARYA Sciences (ARYE) 13M share IPO priced at $10.00

·     Iveric bio (ISEE) 11.65M share Spot Secondary priced at $8.60

·     Pulmonx (LUNG) 2M share Block Trade priced at $39.25

·     Two Harbors (TWO) 40M share Spot Secondary priced at $6.50

·     Unicycive Therapeutics (UNCY) 4.55M share IPO priced at $5.00